What Goes Unmeasured Can Get Mismanaged

The IMF just reduced its growth forecast for the US, raising slightly its assessment for Europe. China’s growth is also slowing. But the IMF may not be measuring all that needs to be measured.

By Vikram RangalaWednesday, April 15, 2015 - 00:00

What Goes Unmeasured Can Get Mismanaged

Peter Drucker famously wrote, “What gets measured gets managed.” And what doesn’t get measured may get mismanaged. Let me explain, using energy as an example.

Part of how the IMF decided these economies are slowing is that their energy consumption didn’t surge even though oil prices are cut in half and supply is abundant. By the old economic models, if you’re not burning all the petroleum you can, you must not be doing much. India is poised to surpass China in GDP growth and part of the reason for saying that is India’s increased demand for foreign oil and its ability to afford more because prices are so low.

But is measuring oil supply and demand a good way to measure how much energy we generate and need? And is that measurement in turn a good way to judge how strong our economy is? US stocks have rallied over the last few days, partly because of a rise in energy sector stocks, which in turn are presumed to have risen because the price of crude oil went up.

ENERGY SECTOR IS MORE OF A SLIVER

The thing is, while energy sector stocks make up about 10% of the S&P 500, they’re barely one percent of US GDP. It’s a classic example of how the stock market measures something other than what the world as a whole needs to measure. The companies in the S&P Energy Sector are all fossil fuel-related. But, as Bloomberg reported Wednesday, “The world is now adding more capacity for renewable power each year than coal, natural gas, and oil combined.”

Stock indices don’t give the same weight to solar and renewables because the companies are small compared to Halliburton, ExxonMobil, and TransOcean. Even outside the stock market, we don’t measure the net output of all those rooftop solar panels in the same calculations where we measure fossil fuels. In fact, as more households sell to the grid instead of buying from it, we’ll see utilities losing revenue even as we produce more power.

Perhaps most telling, we hardly measure at all the true cost of global warming. We’re barely getting around to admitting it’s real.

THE ENERGY TIPPING POINT IS NOW BEHIND US

But some people are measuring the potential of renewables. While Elon Musk builds his “Gigafactory” to produce batteries on an unprecedented scale, his cousins’ company SolarCity is on a mission to make rooftop solar a major part of every city’s power grid. In the last couple of years, we’ve passed the tipping point. It is going to happen.

Bill Gates is backing one of several new battery tech firms who are close to shipping working products. Already, Hawaii’s main utility is worried they won’t be able to pay all the Hawaiian households selling them electricity they generate on their rooftops. They weren’t expecting to face so much power, electrical and political, so soon.

The International Energy Agency says that by 2050, the biggest single source of energy in the world will be solar, an unlimited and free fuel that no commodity can compete with. It doesn’t require power plants and it can be stored anywhere you can stick a battery. If you can’t measure its production and distribution the same way as fossil fuels, then you can’t price solar and wind the same way, either.

OLD ENERGY, OLD MONEY, OLD MATH

Even while the world struggles to properly value new energy, it’s watching the value of old energy decline, maybe forever. Oil- and commodity-based economies are burning through their foreign currency reserves and selling their foreign bond holdings. While their divestment from Eurozone government bonds, for example, may be offset by the ECB’s buying, the change in the buying habits of countries with petrodollars is likely to last.

Gone are the days when Gulf sovereign wealth funds bought skyscrapers, sports teams, and other trophies. Saudi Arabia lost over 20 billion in foreign exchange reserves in February alone. That’s why oil producers are planning for the post-petroleum economy, even as they pump like crazy to sell what they can, while they can.

As long as we calculate how well our economy is doing by how much fossil fuels we burn, we’re stuck in an outdated way of measuring. It would be like someone in 1908 calling Henry Ford a failure in the transportation business because he hadn’t sold a single mule.

New ways to generate, store, and use electricity are growing exponentially and we aren’t even measuring that growth properly. Innovations in renewable energy may offer a doorway to a prosperous future, but the way we’re failing to measure and thereby manage our true progress, it’s like we’re stumbling through that doorway backwards with our eyes closed.

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